Everyone is desparate to hang on to their houses. Some hopeless borrowers hold our for sentimental reasons, and in California many struggle for financial ones. There comes a time when reality sets in and people just let it burn.

Foreclosure sales are being canceled at a record rate. That sounds like good news. If it were occurring because (1) borrowers were curing their loans or (2) loan modifications were successful or (3) short sales were occurring more frequently, it might be something to celebrate. Unfortunately, none of those is occurring. Banks are canceling foreclosure auctions because they are overwhelmed by delinquent borrowers, and they don't have the slightest idea what to do about it.

Lenders are canceling more foreclosure sales in California than ever before, and new financial and political demand for short sales could be the culprit.

Lenders canceled nearly 22,000 California foreclosure sales in June, driven mostly by JPMorgan Chase. It’s a 27% increase from May, a 153% growth from a year ago, and an all-time high, according to ForeclosureRadar, which tracks foreclosures in the state.

Foreclosure sales can be canceled for successful loan modifications, short sales, a legal requirement, or even a filing error. In terms of strategy, a spokesperson for JPMorgan Chase said the bank has not made any policy shifts to cancel more foreclosure sales.

According to ForeclosureRadar, a certain number of the cancellations can be attributed to pending modifications and short sales, but homeowners and real estate agents have complained to the company of sales that were canceled without either.

This trend underscores how clueless the banks really are. They have no idea how to resolve this problem, so they lurch from one failed solution to another. The backlog of foreclosure properties is enormous, so pulling back from foreclosure in the short term is like bailing the sink before pouring in Liquid Plumber. They still have a clog and a sink full of soiled water, but they realized continued filling the sink is doing them no good.

Unfortunately, canceling all their foreclosure sales isn't going to work either. They can't foreclose on everyone because there simply isn't enough cash available to absorb a couple of trillion dollars of real estate at the courthouse steps. Resolving the backlog of delinquent borrowers is going to require a combination of successful loan modifications, short sales, and foreclosures.

The successful loan modifications will be few and far between because most borrowers are hopelessly overextended. Short sales will clear out a large number of properties, but it still requires active participation by the seller. Many properties are abandoned and many have squatting owners who are sitting there waiting for the Sheriff to evict them. Short sales alone will not solve this problem.

JPMorgan Chase is undoubtedly canceling too many foreclosures, and when the short sales don't happen — and many will be killed by owners gaming the system — the Chase and other lenders will need to ramp up their foreclosures again later to clear out the trash.

“We have seen a shift over the last couple of months where homeowners want this process to be over and they want to start to rebuild,” said a spokesperson for ForeclosureRadar.

Researchers at the company received varying answers as to why the cancellations are up. The best answer came from one unnamed REO professional. According to the source, the Home Affordable Foreclosure Alternatives (HAFA) program had the most to do with the cancellations. The Treasury Department launched HAFA in April to provide incentives to servicers for conducting short sales and deeds-in-lieu of foreclosure to homeowners who fail the Treasury’s Home Affordable Modification Program (HAMP).

Loan modifications are obviously not working. The HAMP program is a dismal failure for a number of reasons, not the least of which is the borrowers themselves:

“Now that servicers have systems in place to administer the program they are removing delinquent loans from the foreclosure pipeline to allow a reasonable short sale time period,” the source told ForeclosureRadar. “Predictably (also my opinion) the period would be expiring just after the November elections so there would be less political blowback as those properties that don’t conclude with a successful short sale are taken to foreclosure and ultimately, REO.”

This is a brilliant observation. Politics plays into this decision. Expect to see increases in foreclosure filings again after the elections when the short sales do not go through.

After foreclosure activity dropped across the board in May, new foreclosure notices increased 6.7% in June, and notices of trustee sale jumped 21%. In fact, notices of trustee sales have outnumbered preliminary notices of default for the past four months. The gap really widened in June, when there were almost 9,000 more notices of trustee sale.

But this trend could become the norm as banks have to restart more foreclosures than they initiate.

“Historically it is very unusual to have more Notice of Trustee Sale filings than Notices of Default” says Sean O’Toole, founder and CEO of ForeclosureRadar. “But with skyrocketing cancellations and the possibility of failing loan modifications, this will be increasingly common, as lenders are only required to file a Notice of Trustee Sale to restart the foreclosure process.”

Lenders pushed 23% fewer properties into REO status in June and 46% less than a year ago. The amount of properties that have received a notice of default but have not yet been scheduled for sale increased 8.8% in June, but further along the foreclosure pipeline, inventory remains constricted. The amount properties scheduled for sale dropped 1%, and REO inventory declined 4.8% in June.

Shevy and George are out in the trenches making offers on short sales daily. I spoke with Shevy yesterday, and he hasn't noticed any increased willingness among the various parties to make these deals happen faster. The usual culprit is the second mortgage holder.

The HAFA program pays the second mortgage holder $1,500 to go away. Most aren't taking it. Since many Orange County borrowers have assets, these second mortgage holders are demanding the sellers liquidate and pay them off before they approve the sale. In typical OC fashion, most of these sellers are unwilling to pay up. Perhaps at the lower rungs of the housing market where the borrowers have no assets, more short sales will go through, but in more affluent areas, the HAFA program is doing nothing to facilitate short sales.

Owners who attempt selling short haven't come to accept that they must be insolvent in order to walk away. The fantasy among most of them is that they can short sell and keep all their stuff. It doesn't work that way. Unless people start selling their assets to pay off these second mortgages, don't look for more successful short sales to occur in Orange County. It isn't going to happen.

Most owners will use delays in the short sale process to further game the system. It is an easy way to add six months to a year to the squatting process. The longer they play along, the more time they have to hide their assets and possibly get some price recovery.

As I have said before, all the parties involved have incentive to drag this process out. The end result is a great deal of squatting and more accelerated default. Once everyone has stopped paying their mortgage, the banks will be forced to resort to foreclosures to clean up the mess. More foreclosures are going to happen.

As banks attempt the transition to short sales and fail, the inventory should continue to balloon. More houses are being put up for sale, but the pace of transactions is not increasing. Between the flippers bringing foreclosures to the market and owners listing more short sales, I expect to see inventory to continue to rise.

Option ARMs are not affordability products

Many people took out Option ARMs because they could not afford the payments on a conventionally amortized mortgage. This was a classic affordability product, but as I have pointed out, Affordability Mortgage Products Make Prices Unaffordable. The previous owner of today's featured property used an Option ARM and despite a significant down payment, he couldn't afford the payments on this property.

This house was purchased on 8/12/2004 for $620,000. The owner used a $461,000 first mortgage and a $159,000 down payment.

On 7/27/2007, just before the credit crunch stopped origination of these products, the owner refinanced with a $458,400 Option ARM with a 1.75% teaser rate.

Foreclosure Record

Recording Date: 04/20/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 11/24/2009

Document Type: Notice of Default

This guy didn't get as much squatting as most. The property went to auction on 5/20/2010, and the opening bid was $409,500. To the pleasure of the first lien holder, the property was bid up to $445,300. The flipper stands to make a reasonable profit on the deal.

31 thoughts on “Banks Cancel Foreclosures in Shift to Short Sales… For Now”

I’d like to hear more about those “gaming” the system. So many articles in MSM portray only what they think are sad cases of an unfortunate few facing foreclosure for “legitimate” reasons.
Anyone have the guts to go on record and explain to IR how they’ve pretended to pursue a mod, then maybe a half-hearted effort to short sell, then filed BK all to delay the FC 2-3 years?
I know it’s being done by some.

The MSM wouldn’t want the sheep to learn about this and get upset. Here in the bubble states, it’s a well known fact and most people are aware. But if you go back to Nebraska, I doubt most people there really know how bad the system is being gamed on the coasts all with their hard earned tax money!

The video was posted in the comments on Saturday’s post by OrangeRenter. At the end of the video is a plug for the website http://www.xtranormal.com/. I haven’t made one myself yet, but it looks pretty easy, and I will probably add it to my cartooning when I learn how.

We have been looking for a rental property for some time now, and looked extensively in that neighborhood.

The neighborhood is perhaps one small notch above an apartment complex minus any amenities (like the gym, clubhouse, etc.) My only impression was “depressing” and we eliminated that part of Turtle Rock from consideration.

Rents there are somewhat reasonable – 3br/2ba goes for $2400-2500/mo. A 2br/2ba goes for ~$2100-2200.

Even at $445K purchase price, it is still cheaper to rent, and with the additional $100K now it just does not pencil out.

Assuming one would want to live in those dark and rather tenement looking depressing units.

Thanks for a great post, IR. You’ve answered the biggest question I’ve had on my mind as I’ve looked at all the housing numbers lately. Another can kicking govt effort.

Big thanks for the real time update on the short sale effort and second mortgage holder demands. I know it’s a pretty pointless effort to try to make squatters sell their hard earned HELOC toys as a condition for the second to be signed off. Even so, it just makes me smile. Oh the indignity of it all!

” * This house was purchased on 8/12/2004 for $461,000. The owner used a $461,000 first mortgage and a $160,000 down payment.
* On 7/27/2007, just before the credit crunch stopped origination of these products, the owner refinanced with a $458,400 Option ARM with a 1.75% teaser rate.”

Wouldn’t a $461,000 first mortgage w/$160,000 down mean a purchase price of $621K?

You mention that many of these squatters have assets, which I think is the key to immediate strong price gains in Irvine. With these assets they will purchase gracious homes, gracefully stepping aside from their old burdensome obligations into another wonderful Irvine residence.

That’s the secret of Irvine: well-heeled, discerning buyers. These propertied, high-class wealthy homeowners would never consent to abandon Irvine over something like a foreclosure. No, such discriminating people of good character and solid family background will brush off any current debt obligations and pay cash for their next wonderful Irvine home, in sophisticated travertine and pergraniteel. Yellow hordes of stereotypical foreign cash buyers, their children busily studying calculus in the back seats of their idling BMWs, will bid against these squires in a friendly race to drive Irvine homes ever higher in price.

In the unlikely scenario of any buyer requiring credit, government banking policy will provide. Money shall remain cheap. Forever.

Live the dream that is Irvine: return from each Starbucks run with latte in one hand and leather-clad steering wheel in the other, and gaze lovingly at yourself in the rear-view mirror as you feel the white-hot envy of those Riverside peasants, locked out of Irvine forever, never to know what it means to be financially savvy, cultured, and propertied!

There were more than one baby born today in Irvine. Driving home in their plush Porsche Cayenne,, a glimmer was in their eye pondering how they would one day convert their bountiful 2 day old trust fund into a decadent Irvine abode in 2037.

In the front passenger seat the beautiful new mother read last weeks article in Forbes magazine. She snickered at her invincible and well endowed husband, “did you know Las Vegas and Riverside are still ranked the top 2 riskiest markets?”. The husband just laughed as he stopped to pump more 93 octane gas into their family car. He took a minute to use his smart phone to transfer more funds into their new bundle of joy’s trust fund… thinking: my daughter will never live in that type of squalor.

Desire is not demand… one of my favorite IR quotes and nothing more true. Demand requires savings, good credit and cash flow capability. Almost none of these things exist above about 600-700K… look out below. What do you think will happen when we finally start looking at rising rates for our life times? Prices will crumble as rates rise… It is in our future.

I think you’re right, but there is the possibility, however unlikely, that we’ve guessed wrong.

Prices will fall as rates rise UNLESS the gov’t decides to inflate their way out of this recession. And that’s the game of chicken we’re playing here, isn’t it? We all believe that this is going to continue to be a deflationary recession with falling demand and prices. If the Fed hawks can continue to restrain the doves, it will probably continue that way. However, there’s been a lot of easy money over the past couple years. Also, the doves currently outnumber the hawks at the Fed, although the Fed’s traditional desire for consensus has held them back.

Inflation could kick in quickly and without warning. If it does, prices and wages will skyrocket. Retirees on fixed incomes will be screwed, but all those underwater homeowners may find themselves floating to the surface. I don’t think it will turn out this way, but hey, we could be wrong.

I wonder if the politicians will go for it – with the baby boomers hitting the retirement, it only takes a single cry of “fire” by the AARP to stampede them and vote both of the Con chambers… er… Congress chambers I mean out.

If they can think that far ahead, they will probably avoid the inflation option like the plague. But then again, our elected representatives are not exactly known for deep critical and strategic thoughts.